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Tuesday, August 17, 2010

Cebu Pacific on track with expansion plans

* Cebu Pacific expects to carry 10 million passengers in 2010

* Cebu Pacific says PAL's disruption is manageable

* Airline doubling its fleet capacity in 4 years

* Gokongwei favors open skies, sees more growth in local and foreign travel

MANILA, Philippines - Cebu Air Inc., operator of budget carrier Cebu Pacific is pursuing its expansion in Asia amid expectations of sustained growth in both local and international travel.

In an exclusive interview with ANC's Business Nightly, Cebu Pacific President and CEO Lance Gokongwei said prospects for the local airline industry are good, despite several concerns plaguing domestic carriers.

"The Philippine airline industry has not really been a very well known success story over the last 5 years. In fact, for Cebu Pacific, in the year 2005, we carried 2 million guests. In 2010, we expect to carry 10 million guests. Contrary to a lot of bad news going around, the Philippine airline industry in fact is very buoyant."

He said that Cebu Pacific had a good year in 2009 and expects 2010 to be an even better year for the airline which now controls 50% of domestic capacity, outpacing its rival Philippine Airlines (PAL) which has a 30% share of the domestic market.

In 2009, which was perceived as a bad year for the airline sector, Cebu Pacific increased its business by 30%, it
carried from over 6 million passengers in the previous year to 8 million passengers.

"So I say the Philippine aviation industry, if we're talking about Cebu Pacific in particular, remains quite buoyant. I've been going around the country, I've talked to a lot of the inn keepers, and resort keepers, and I would say domestic tourism is very buoyant. I think inward tourism in particular - Taiwan, Korea, China, that is buoyant as well."

Gokongwei said that Cebu Pacific is investing very heavily in its capacity and expects to double its capacity in the next 4 years.

Cebu Air earlier said it will spend P4.9 billion on fleet expansion to increase the company’s domestic and overseas destinations. By the end of 2014, Cebu Pacific’s fleet size would have grown to 51—composed of 10 Airbus A319s, 33 Airbus A320s and eight ATRs from only 29 aircraft.

Gokongwei said that in the next 4 months, Cebu Pacific will be adding 20% of its capacity in the Philippines, which means an additional 2 million seats annually.

"That shows our belief that this industry will continue to grow, notwithstanding these issues facing the Philippines with regards to the significant safety concerns raised by the European blacklist and the US Federal Aviation Authority."

Safety issues

Despite healthy prospects, local airlines are beset with safety issues that if neglected, will limit the industry's growth, said Gokongwei.

Cebu Pacific wants to begin flying to Guam but it is restricted by the Category 2 rating given by the US Federal Aviation Administration. The US FAA had earlier downgraded PAL operations and put them under heightened scrutiny because of their inadequate safety standards. A Category 2 rating means Philippine carriers can continue flying to the US but only under heightened FAA surveillance.

US FAA rules also prevent airlines from the Philippines from expanding services to the United States under a Category 2 rating.

In March of this year, the European Union banned all airlines from the Philippines and Sudan from flying into the region’s airports, citing “serious safety deficiencies” found by the United Nations and US aviation authorities.

"These are very serious industry concerns. They point to the continuing need for the Philippine government to improve their regulatory authority over the entire Philippine aeronautical industry. It does affect us because anything that affects the reputation of the Philippine aviation industry does affect the country, whether directly or indirectly."

Gokongwei said the entire industry has to support the Department of Transportation and Communication and the Civil Aviation Authority of the Philippines in making sure all steps are taken to overcome these obstacles set by foreign regulatory bodies.

Open skies

Gokongwei also favors the open skies being pushed by the Association of Southeast Asian Nations (ASEAN).The ASEAN open skies pact focuses on the liberalization of air space between member countries, including the lifting of tariffs and other add-on costs.

"We are in favor of passing the ASEAN capital region open skies. In fact, Cebu Pacific wants to fly to many more routes, we want to add routes to Singapore, Kuala Lumpur, Jakarta, Bangkog, Hong Kong, China, but right now the current air rights are restricted. So we would be supportive of any efforts by the government to expand linkages to the Philippines."

He said however, that open skies should not be lopsided.

"I think one concern we do have about open skies, we want to make sure that it's not one-way open skies. That privilege granted by Philippine carriers to a foreign carrier, should likewise be given to a Philippine carrier. That's the only caveat, these air rights are natural resources and they should be for the benefit of the entire industry."

The farthest that the country has done with opening its skies was granting only the fifth- freedom rights to foreign airlines, a permission to allow non-Philippine commercial aircraft to pick up passengers and cargo only in ports of call.

Filling PAL's vacuum

The looming labor strike at Cebu Pacific's chief rival, PAL, is a short-term disruption to local and foreign travel said Gokongwei.

On the domestic market, Cebu Pacific already has 50% of the market compared to PAL's 30%, he said. But in the international market, PAL is still dominant with a hold on 30% of the local airline industry's capacity.

"So when you lose a large player like PAL, of course there's going to be a short-term disruption. But I believe that business abhors any vacuum and in a situation like that you will see private enterprises like myself trying to fill that vacuum quickly."

Aside from Cebu Pacific, other smaller airlines are waiting in the wings and will try to meet whatever the gaps in demand there are, added Gokongwei.

For its part, Cebu Pacific is already taking steps to safeguard against the very same issues PAL is grappling with, he said.

"Our philosopy is that we have to prepare for it in multiple ways. I think we start with the premise that we have to start with a competitive wage, competitive benefits. We have to recognize that a lot of attractions abroad are simply just very attractive."

Cebu Pacific he said, has already planned out its recruitment until 2012, and is making sure that it has enough skilled people and skilled pilots to fly its planes for the next few years.

"We continue to build on that pipeline through a training and recruitment. In the end it's 3 things: first is a competitive financial package, second, hopefully our people enjoy working for the company and they find it a family they want to grow old with for many years, and third, is we just have to be prepared."

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